Composition Scheme Under GST - Eligibility, Rules, Rates

When GST was introduced in India, many questions arose. One key concern was how small businesses could manage the new tax system. GST aimed to simplify taxes by replacing many with one unified system.

In fact, there were various other advantages of GST as well. However, it brought complexity and compliance challenges. Therefore, to help small businesses, the GST Composition Scheme was introduced. This scheme simplifies tax compliance by allowing eligible businesses to pay a fixed tax rate on their turnover. But the question is how?

Read this guide to learn more about the composition scheme under GST. Understand what is the composition scheme in GST and what its rules are. So, let us get started here without any further delay.

What is the GST Composition Scheme?

The GST Composition Scheme is a simplified tax option for small businesses. It allows registered persons with an aggregate turnover of up to Rs.1.5 crore for goods and Rs.50 lakh (for services or mixed supply) in the preceding financial year to pay a fixed percentage of their turnover as tax instead of standard GST rates. For restaurants not serving alcohol, this turnover limit is Rs.1.5 crore.

For businesses in special category states, the turnover limit for goods is lower at Rs.75 lakh instead of Rs.1.5 crore, while the limit for services remains Rs.50 lakh. These states include Arunachal Pradesh, Assam, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Tripura, and Himachal Pradesh.

Similarly, restaurants that do not serve alcohol can opt for the scheme if their turnover is up to Rs.1.5 crore in general states and Rs.75 lakh in special category states.

This scheme replaces the need to pay standard GST rates on individual transactions, which can be cumbersome. As a result, the Composition Scheme under GST is ideal for saving time while maintaining compliance with tax regulations.

There are additional benefits to the Composition Scheme as well. It reduces administrative burdens and compliance costs by requiring less detailed record-keeping. Moreover, it enables businesses to make quarterly tax payments, which can help them manage cash flow more effectively.

Eligibility for Composition Scheme GST

To opt for the composition scheme under GST, you need to pass certain criteria. So, the key criteria that you would definitely need to pass are as follows:

Turnover Limit:

• Businesses dealing in goods must have an annual turnover up to Rs.1.5 crore (or Rs.75 lakh in special category states).

• Businesses providing services or mixed supply must have an annual turnover up to Rs.50 lakh, regardless of the state.

• Restaurants that do not serve alcohol must also meet the turnover limit of Rs.1.5 crore in general states and Rs.75 lakh in special category states.

Business Restrictions:

• The business must not engage in interstate sales (selling goods or services outside the state).

• Businesses cannot sell through e-commerce platforms like Amazon or Flipkart if they are required to collect tax at source under Section 52 of the CGST Act.

• Certain industries are not eligible, including manufacturers or traders of ice cream, aerated water, pan masala, tobacco products, and specific types of fly ash bricks and building materials.

Taxation Rules:

• No Input Tax Credit (ITC) can be claimed under the Composition Scheme.

• Businesses must pay tax on a reverse charge basis for specified inward supplies.

• If a taxpayer operates multiple businesses under the same PAN, all businesses must collectively opt for the Composition Scheme or stay out of it.

When Can You Opt for the GST Composition Scheme?

To avail of the GST Composition Scheme, businesses must submit an online application to the tax authorities. The process varies depending on whether the taxpayer is newly registered under GST or already registered as a regular taxpayer.

If you are registering for GST for the first time, you can opt for the Composition Scheme while applying for your GST registration. This must be done by selecting the option in Form GST REG-01 during the registration process. 

If you are already registered under GST as a regular taxpayer, you can switch to the Composition Scheme by filing Form GST-CMP-02 on the GST Portal. However, this must be done before the start of the financial year in which you want to opt for the scheme.

GST Composition Scheme Rules

Just like knowing the types of GST is not enough, you need to understand the rules for using them; the same applies here, too. So, while you know the eligibility criteria and those who cannot apply, there are certain rules to understand. So, here are the points to know:

• The applicant must have a valid GST registration.

• No Input Tax Credit can be claimed by a dealer opting for the composition GST scheme.

• A person must not be an NRI or casual taxable individual.

• Taxpayers should not be involved in the inter-state purchases or supply of goods from any office located anywhere else but in the state.

• The dealer cannot supply GST-exempted goods.

• The normal composition scheme GST rates are applied for transactions under the Reverse Charge Mechanism.

• All segments of businesses under the same PAN should be registered under the scheme collectively or opt-out of the scheme.

• Mention the words ‘composition taxable person’ on every notice, signboard, notice, and bill of supply issued, not a tax invoice.

• Those supplying goods can then provide services of up to Rs.5 lakh.

Composition Scheme GST Rates

Knowing the composition scheme GST rate is equally important too. This simplifies tax compliance for small businesses by allowing them to pay GST at fixed rates based on their turnover.

In addition to this, it is important to understand the distribution between the SGST/UGST and CGST. This is how it works:

• 1% GST includes 0.5% CGST and 0.5% SGST/UGST

• 6% GST is with 3% SGST/UGST and then 3% CGST

Now, based on the applicable rates, you will find the rates for various professionals and businesses mentioned in the table below:

So, when you opt for the composition scheme under GST rate, you must pay lower tax. Additionally, your tax under the state and the central government is equally distributed. 

But how do you apply for it? What are the forms that you must be using? Well, let us check all the details in the next section.

GST Composition Scheme Forms

When you register the business under the composition scheme, you would need to use multiple forms for different purposes. So, here is the detail of the forms that are generally used:

Validity for Composition Levy Under GST

The validity of the composition levy is based on certain factors. So, here are the key ones that you must be aware of:

• The Composition Scheme remains valid if the taxpayer satisfies all conditions specified in Section 10 of the CGST Act and relevant rules.

• If a taxpayer ceases to meet any of the conditions, they must withdraw from the Composition Scheme by filing Form GST CMP-04 within seven days.

• The Composition Scheme becomes effective from the beginning of the financial year if the option is exercised before the start of the year.

• For those switching from regular GST to the Composition Scheme, it becomes effective from the first day of the next month.

• The Composition Scheme is available for businesses with an annual turnover up to Rs.1.5 crore (Rs.75 lakh for special category states).

• The taxpayer must withdraw from the scheme if the turnover exceeds the specified limit during the financial year.

• Taxpayers must file quarterly returns (GSTR-4) and pay taxes accordingly.

• They must maintain compliance with other GST regulations, such as displaying "Composition Taxable Person" on signboards and bills of supply.

It is also important to know the implementation date for the composition levy. 

• If you plan to use Form GST CMP-02, the effective date starts from the new financial year.

• If you are going for fresh registration via Form GST REG-01, the effective date is examined with the help of the provisions of sub-rule 2 or 3 of Rule 10 of CGST Rules, 2017.

Steps to Opt for the Composition Scheme Under GST

Now, that you know about the GST composition scheme limit and the rest of the details, it is time to know the application process. So, here are the brief steps that you must follow while applying for the same.

1. Visit GST Portal: Go to the Goods and Services Tax portal.

2. Login into Portal: Enter the correct ‘Username’ and ‘Password’ credentials along with the captcha in the required field and click ‘login.’

3. Application to Opt for Composition Levy: Select ‘Application to Opt for Composition Levy’ from the Registration Menu under the service tab.

4. Details Displayed: The page shall redirect to the new page, where the Application to Opt for Composition Levy page will be displayed with the following details:

   • GSTIN

   • Legal Name of Business

   • Trade Name (if any) as well as

   • Address of Principal Place of Business

5. Composition Declaration: Check to pledge to abide by the rules and conditions for the Taxpayers under the Composition Levy.

6. Verification Process: Check the box for the Verification process (below the Composition Declaration) that states that all the information given is true and that nothing has been concealed from the authority.

7. Authorized Signatory: Select the Authorized Signatory from the drop-down menu.

8. Place: Enter the place where the application is filed in the Place field.

9. Submit the Application: Sign the form using either the Digital Signature Certificate (DSC) or the EVC option.

10. Using DSC Option: If using a DSC, the applicant must select the registered DSC from the emSigner pop-up screen and proceed accordingly.

11. Using EVC Option: If using the EVC Option, Enter the OTP and then click on the Validate OTP button.

12. Acknowledgment Message: On successfully applying to the cancellation of registration, the system shall generate the ARN and display a confirmation message.

13. Confirmation Message: GST Portal also sends a confirmation message to the registered mobile phone number and email.

With this, your application process ends. 

Pros and Cons of Composition Scheme Under GST

Benefits of GST Composition Scheme

1. Simplified Compliance: The scheme reduces the complexity of GST compliance. Multiple time filing is not needed. This saves time and allows you to manage your taxes better.

2. Lower Tax Liability: Businesses pay a fixed percentage of their turnover as tax. Also, this is usually lower than the standard GST rates for many small businesses.

3. Less Record Keeping: The tax is being paid on the turnover and no transactions. So, this basically means there is no need for very complicated book-keeping.

4. Improved Liquidity: By not requiring the payment of GST on each transaction, businesses can maintain better cash flow.

5. Reduced Penalties: The scheme offers fewer chances for errors and penalties since it involves less complex compliance.

Disadvantages of GST Composition Scheme

1. No Input Tax Credit (ITC): Businesses under the Composition Scheme cannot claim ITC on purchases, which can increase their cost of goods sold.

2. Restriction on Interstate Supplies: The scheme restricts businesses from making interstate supplies. This limits their reach to the extended market. Additionally, there are certain GST-exempt goods that are not part of this. Also, sales on e-commerce platforms are restricted.

3. Higher Tax Rate for Services: The tax rate for service providers is higher (6%) compared to traders and manufacturers. This can be a disadvantage for service-based businesses.

4. Signage Requirements: Businesses must display "Composition Taxable Person" on signboards and bills of supply, which can be an additional compliance requirement.

Conclusion

The GST Composition Scheme offers a simplified tax compliance framework for small businesses. However, there are certain limitations linked to it. Businesses must carefully evaluate these factors to determine if the Composition Scheme aligns with their operational needs and growth strategies.

By understanding the pros and cons, small businesses can make informed decisions that optimize their tax compliance and financial management under GST.

FAQs

Q. Can a business under the Composition Scheme sell goods through e-commerce platforms?

No, businesses under the Composition Scheme cannot sell goods through e-commerce platforms. This is one of the restrictions of the scheme.

Q. How does the Composition Scheme affect interstate supplies?

Businesses under the Composition Scheme are not allowed to make interstate supplies. This means they can only supply goods or services within their state.

Q. What happens if a business exceeds the turnover limit during the financial year?

If a business exceeds the turnover limit during the financial year, it must withdraw from the Composition Scheme by filing Form GST CMP-04 within seven days of exceeding the limit.